• 29 September 2020
  • alternative investing|alternative lending|p2p investing|P2P Lending|sme lending

Alternative Investment: P2P Lending’s Growing Potential


Covid-19 is an unprecedented event in recent history. Even the SARS epidemic in 2003 and the Global Financial Crisis of 2008/9 fail to come close: this is the first time we’ve seen large swathes of the economy in many developed nations simultaneously close down.

Since February this year, we’ve been seeing a slew of financial shocks that have disrupted conventional markets, including commodities and equities. In April this year, oil prices fell so low that they registered as negative. In America this month, 10-year bond yields fell below 0.5% as investors fled for safe haven assets. In March, US stocks ended the quarter down 20%—the biggest plummet since the Global Financial Crisis.

This is all before taking into account the full impact of Covid-19. We have yet to address logistical disruptions as countries close businesses and restrict travel, and entire industries see companies teetering on the brink. Singapore Airlines, for instance, posted an annual net loss for the 12-months ending on 31st March—the first such event in 48 years.

It’s worth noting that some of the affected sectors, such as oil and aviation, also tend to be more highly leveraged. This carries the risk of defaults or delayed payments to banks, thus spreading the risk to the financial sector. 

Are the traditional “safe havens” still safe?

In light of the volatility instigated by Covid-19, where can investors turn?

Gold, silver, and precious metals are often a common response. But gold prices are peaking (around US$1,600 at the time of writing), and buyers looking to jump in now will do so at a premium. Bond yields are at historic lows, with returns so low that even some savings accounts are a more attractive prospect (if you include bonus tiers). 

As for real estate, the sector has been hit by incidents of tenants refusing to pay rent (or more often than not, just being unable to). Within Singapore itself, rental volumes have plunged by over a third, and there is little light at the end of the tunnel. When downturns occur, companies often cut costs; this means foreign tenants return home, or expatriate housing allowances shrink. Further, investors must now consider whether illiquid assets like property are appropriate given the downturn.

SME lending continues to be an attractive asset class 

SME lending, commonly done through peer-to-peer (P2P) lending platforms, allows individuals to invest in companies of their choice, via short-term loans that typically last no longer than 12 months. While relatively new to Southeast Asian markets, P2P lending to SMEs is an area that is regulated in many ASEAN countries.

In Singapore, for example, P2P lending platforms are regulated by the Monetary Authority of Singapore (MAS). Some online lending platforms, like Validus, offer SME lending opportunities exclusively to accredited investors, and provide insurance for capital protection, use escrow accounts, and thoroughly vet all borrowers.

P2P lending to SMEs has a number of traits that make it well adapted to the current situation:

  • Low correlation to conventional stock and bond markets
  • Better returns than conventional bonds 
  • Allows for diversification 
  • Short loan tenures to retain liquidity
  • Simpler and more transparent than many other alternatives 
  • SME borrowers are well supported in Singapore 
1. Low correlation to volatile stock markets

SME lending is not directly tied to public markets. This allows investors to sidestep the volatility introduced by Covid-19 while still getting market plus returns. Loans to SMEs will not, for example, be affected by the sentiments of retail investors, which can cause stock values to plummet upon a single adverse news report.

2. Better returns than conventional instruments such as bonds

SME lending can provide attractive risk-adjusted returns, depending on the financing platform. On the  Validus platform, this can range from 8% to 12% per annum. As with other debt instruments, investors receive an absolute return rather than variable returns based on a benchmark.

3. Allows for diversification 

For many P2P platforms that offer SME lending, the minimum investment amount in each company is low; often just $1,000. This makes it easy to spread risk across a range of SME loan products, as well as to spread risk across multiple companies with low correlation in different sectors. This ensures that your portfolio is not significantly impaired by the failure of any one company.

4. Short loan tenures to ensure flexibility

Crisis situations like Covid-19 also present opportunities if you have a well-managed portfolio. Because P2P loans to SMEs are of very short duration (30 days to 12 months), you retain the flexibility to take advantage of these. 

Shorter-term loans also make P2P lending more attractive to SME borrowers, as approval times are quicker (often within 24 hours), and the loan quantum can be smaller (banks seldom find it viable to provide small loans such as $25,000 or under, which SMEs often require on short notice). This, in turn, means investors have a constant stream of new opportunities to create passive income.

5. Simpler and more transparent than many other alternatives

P2P lending is one of many within a diverse range of alternative asset classes outside of conventional stocks and bonds. However, it may be the most transparent and the simplest to understand.

Other alternatives may be on the exotic side—think wine, fine art, or stamps. These are opaque to non-collectors, or may be so complex they end up involving just as much risk as conventional markets anyway. In addition, liquidity becomes an interesting obstacle where valuation of these alternatives is often complex and subjective.

In contrast, SME lending is straightforward: lend to a company and get back your principal with interest. It’s simple enough that you can manage the investment just over a smartphone, in a matter of minutes. Validus offers transparent, flat fees with no lock-in requirements, as well as an optional auto-invest feature to save you time.

6. SME borrowers are well supported in Singapore 

The Singapore government is highly supportive of SMEs, having already allocated some $4 billion to support them amid the Covid-19 outbreak. The government has even passed regulations requiring some commercial landlords to pass on rental rebates in order to support local business. In addition, wage support schemes are in place to help SMEs cope with payroll costs.

This support creates an environment in which many SMEs have the working capital to maintain adequate cash flow but seek financing for growth, often times specifically around trade financing. 

The demand for SME loans is likely to increase post-Covid-19

In April, DBS noted that they received more than 200 SME loan enquiries each day in the first week of April. This was four times the number in January. The enquiries were mostly from micro and small enterprises. 

Nonetheless, many SMES continue to struggle with loan approval. Larger banks are often reluctant to disburse smaller loans, as the efforts to both underwrite the facility as well as to track and collect repayments—along with the small amounts of interest earned—may not make it worth their time. 

As we expect to see an increase in economic activity post Covid-19, many SMEs will require cash loans to restart their business, or to finance purchases from new suppliers. As such, SME loans through P2P platforms will be an attractive, faster option for these SMEs.

This represents an opportunity for investors and small businesses alike. As such, it’s the appropriate time for investors as well as wealth management professionals to take a closer look at P2P lending as an emerging asset class, and examine its unique advantages in a post-Covid 19 economy.


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